Decision signals a new era of employer-friendly judgments
In Canada’s courthouses, there is an invisible pendulum that swings over employment law decisions. It moves between the employer and the employee. Some years, the courts seem to side more often with the employee. Other years, court decisions seem to be more often in favour of the employer.
For the past few years, the pendulum has been largely on the employee’s side. Employers have found it difficult to win cases; the courts — for whatever reason — have ruled more often in favour of the employee.
But there are signs that the pendulum may be swinging back towards the employer.
In a high-profile ruling last month, the Ontario Court of Appeal reversed a $100,000 wrongful dismissal award to employee Kurt Felker. The court found Felker had breached a duty of loyalty to his employer, Electro Source Inc., by setting up his own competing sales operation while still working at the firm. The court ruled high-level employees have a fiduciary duty of loyalty to their employers.
It may not seem to be a landmark decision, since it is an established principle of law that if key employees set up to compete with their employer they may be fired with cause.
“When you look at the facts, the ruling does not represent a great extension of the law,” says Soma Ray, a lawyer at Donahue Ernst & Young. “The courts are accepting an old principle, breach of fiduciary duty, which has been around for a long time.”
But there was a time, not long ago, when the appellate court may have come back with a very different verdict, in favour of Felker.
The courts have not always easily accepted or recognized the fact that employee disloyalty needs to be taken seriously, says Ray. “This decision is an acceptance of a well-rooted principle of law.”
The Felker decision centres largely on the employee’s relative importance to the firm — the fact that he is a fiduciary.
“There is an increasing recognition by the courts that key employees can do tremendous harm to an organization if they cannot be relied upon to fulfill their duty of loyalty,” says Ray.
“You shouldn’t really be working at cross-purposes to your employer when he’s paying you to be a key employee,” agrees Neena Gupta, a lawyer and partner in Goodman and Carr LLP’s HR management group.
It’s important for HR managers to understand the concept of fiduciary duty so they know who falls within the category and what a breach of such a duty would be.
“A breach of fiduciary duty would include such things as taking a corporate opportunity for yourself or working on other duties while you’re on company time,” says Ray.
In this case, Felker decided to do sales work for a client Electro Source had previously turned down. He negotiated with the client while he was still working for Electro Source and used company time to do it.
The case alarmed some people, who worried that it would be applied to any employee who is simply applying for work with another firm without letting his current employer know about it. That is not the case, says Ray.
“The decision has brought on several calls from clients and colleagues,” she says. “There is a fear that this decision means employees in general cannot seek a position with a competitor but that is not what this decision says.”
Evidence of a shift
“I absolutely agree that the pendulum is swinging back to the employer,” says Gupta. “I can’t remember a recent case where a fiduciary is fired for cause and the Court of Appeal finds cause.”
Felker was fired and the courts said Electro Source had no obligation to offer him any notice or severance money.
In contrast, cases one or two years ago came down on the side of the employee, even when there would seem to be enough evidence to suggest the employer would win.
In last year’s Veer v. Dover Corp. (Canada) Ltd., Veer, a senior fiduciary, was deliberately told by his employer not to travel to the firm’s Hong Kong office. He went anyway, and complicated matters by evading calls from his office.
The trial judge determined that what Veer’s boss said (i.e., don’t go to Hong Kong) was not what Veer heard (i.e., it’s still in the best interests of the company for me to go). The courts awarded Veer pay and stock options.
“At the end of the day with costs and everything, it was about a million-dollar loss for the company,” says Gupta.
But the Felker case, along with other recent decisions such as Big Canoe v. Ontario and Tutton v. Pickering, both last December, suggests the pendulum is indeed swinging back towards the employer.
Gupta cites the case of Entrop v. Imperial Oil, released by the Court of Appeal on July 21, 2000.
The case centred on Imperial Oil’s strict drug-and-alcohol testing policy.
Although it is illegal in Canada to conduct random drug testing in most situations, the Court of Appeal in this case made a distinction between drug testing and breathalyzer testing. Drug testing shows only past usage but not whether the employee is currently under the influence of a drug. Random breathalyzer testing in safety-sensitive positions, on the other hand, should be permissible, ruled the court, because it shows current impairment.
Although the employer won in the Felker case and it may signify a new tendency for the courts to favour employers, the smartest thing for HR managers to do is avoid this type of situation in the first place by preparing a watertight employment contract. The contract should spell out whether the new hire is considered a fiduciary.
“Also put in non-competition and solicitation requirements covering not only the time after employment, but the time of employment as well,” says Ray
“Litigation is an expensive and time-consuming way of giving yourself the remedy that you could have up front, with an appropriately worded employment contract,” says Ray.
HR managers may feel that too often contracts are overturned or all but ignored when they reach the courts. That can happen when employees have not been given enough time to review them or felt they had to sign the contract immediately and as written, or they would not be offered the job.
With senior employees, however, contracts are more likely to be upheld, says Gupta.
For the past few years, the pendulum has been largely on the employee’s side. Employers have found it difficult to win cases; the courts — for whatever reason — have ruled more often in favour of the employee.
But there are signs that the pendulum may be swinging back towards the employer.
In a high-profile ruling last month, the Ontario Court of Appeal reversed a $100,000 wrongful dismissal award to employee Kurt Felker. The court found Felker had breached a duty of loyalty to his employer, Electro Source Inc., by setting up his own competing sales operation while still working at the firm. The court ruled high-level employees have a fiduciary duty of loyalty to their employers.
It may not seem to be a landmark decision, since it is an established principle of law that if key employees set up to compete with their employer they may be fired with cause.
“When you look at the facts, the ruling does not represent a great extension of the law,” says Soma Ray, a lawyer at Donahue Ernst & Young. “The courts are accepting an old principle, breach of fiduciary duty, which has been around for a long time.”
But there was a time, not long ago, when the appellate court may have come back with a very different verdict, in favour of Felker.
The courts have not always easily accepted or recognized the fact that employee disloyalty needs to be taken seriously, says Ray. “This decision is an acceptance of a well-rooted principle of law.”
The Felker decision centres largely on the employee’s relative importance to the firm — the fact that he is a fiduciary.
“There is an increasing recognition by the courts that key employees can do tremendous harm to an organization if they cannot be relied upon to fulfill their duty of loyalty,” says Ray.
“You shouldn’t really be working at cross-purposes to your employer when he’s paying you to be a key employee,” agrees Neena Gupta, a lawyer and partner in Goodman and Carr LLP’s HR management group.
It’s important for HR managers to understand the concept of fiduciary duty so they know who falls within the category and what a breach of such a duty would be.
“A breach of fiduciary duty would include such things as taking a corporate opportunity for yourself or working on other duties while you’re on company time,” says Ray.
In this case, Felker decided to do sales work for a client Electro Source had previously turned down. He negotiated with the client while he was still working for Electro Source and used company time to do it.
The case alarmed some people, who worried that it would be applied to any employee who is simply applying for work with another firm without letting his current employer know about it. That is not the case, says Ray.
“The decision has brought on several calls from clients and colleagues,” she says. “There is a fear that this decision means employees in general cannot seek a position with a competitor but that is not what this decision says.”
Evidence of a shift
“I absolutely agree that the pendulum is swinging back to the employer,” says Gupta. “I can’t remember a recent case where a fiduciary is fired for cause and the Court of Appeal finds cause.”
Felker was fired and the courts said Electro Source had no obligation to offer him any notice or severance money.
In contrast, cases one or two years ago came down on the side of the employee, even when there would seem to be enough evidence to suggest the employer would win.
In last year’s Veer v. Dover Corp. (Canada) Ltd., Veer, a senior fiduciary, was deliberately told by his employer not to travel to the firm’s Hong Kong office. He went anyway, and complicated matters by evading calls from his office.
The trial judge determined that what Veer’s boss said (i.e., don’t go to Hong Kong) was not what Veer heard (i.e., it’s still in the best interests of the company for me to go). The courts awarded Veer pay and stock options.
“At the end of the day with costs and everything, it was about a million-dollar loss for the company,” says Gupta.
But the Felker case, along with other recent decisions such as Big Canoe v. Ontario and Tutton v. Pickering, both last December, suggests the pendulum is indeed swinging back towards the employer.
Gupta cites the case of Entrop v. Imperial Oil, released by the Court of Appeal on July 21, 2000.
The case centred on Imperial Oil’s strict drug-and-alcohol testing policy.
Although it is illegal in Canada to conduct random drug testing in most situations, the Court of Appeal in this case made a distinction between drug testing and breathalyzer testing. Drug testing shows only past usage but not whether the employee is currently under the influence of a drug. Random breathalyzer testing in safety-sensitive positions, on the other hand, should be permissible, ruled the court, because it shows current impairment.
Although the employer won in the Felker case and it may signify a new tendency for the courts to favour employers, the smartest thing for HR managers to do is avoid this type of situation in the first place by preparing a watertight employment contract. The contract should spell out whether the new hire is considered a fiduciary.
“Also put in non-competition and solicitation requirements covering not only the time after employment, but the time of employment as well,” says Ray
“Litigation is an expensive and time-consuming way of giving yourself the remedy that you could have up front, with an appropriately worded employment contract,” says Ray.
HR managers may feel that too often contracts are overturned or all but ignored when they reach the courts. That can happen when employees have not been given enough time to review them or felt they had to sign the contract immediately and as written, or they would not be offered the job.
With senior employees, however, contracts are more likely to be upheld, says Gupta.
